China stepped up efforts to curb bets against its currency and reassure skeptical investors, as its central bank set another firm fix for the yuan on Tuesday backed by what dealers said was aggressive yuan buying offshore.
Ebbing confidence in China’s policymaking has fueled investors’ retreat from the slowing economy, and expectations that the currency will fall further has widened the gap between the tightly managed onshore yuan and the Hong Kong-based offshore rate.
The yuan has depreciated more than one percent since the start of the year, having lost 4.7 percent against the dollar last year, and the accelerated slide had raised uncertainty over China’s intentions regarding the exchange rate.
Analysts said offshore buying by state-owned banks, under the direction of the People’s Bank of China (PBOC), dried up yuan liquidity to such an extent that overnight yuan borrowing rates in Hong Kong (HIBOR) hit a record 66.8 percent.
As a consequence the spread between onshore and offshore yuan exchange rates briefly evaporated, having stood at more than 2 percent last week.
“The strength of its (the PBOC’s) actions appears to have reached the ‘nuclear-weapon’ level, and is comparable to that of the steps taken by other central banks when they previously fought against international speculators, such as George Soros,” said a senior dealer at a European bank in Shanghai.
Perceived missteps by the authorities have stoked concerns in global markets that Beijing might be losing its grip on economic policy, just as the country looks set to post its slowest growth in 25 years.
China’s equity markets, which tumbled 10 percent last week and a further 5 percent on Monday, remained volatile, swinging from black to red and back again. The Shanghai Composite Index .SSEC rose 0.2 percent and the CSI300 index .CSI300 closed 0.7 percent higher.
China’s central bank manages the currency by setting a daily target for the yuan, which is allowed to trade within a 2-percentage point band either side.